Week Ending 26th November 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Macro Review 3 United Kingdom United States & Canada Europe Japan & South Korea Australia & New Zealand
Emerging Markets 8 Middle East Africa China Latin America Russia & Eastern Europe South Asia
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18
Agriculture & Resources Energy
Currencies 20
EUR, USD, GBP AUD, JPY, Other Asian
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Week Ending 26th November 2017
MACRO REVIEW United Kingdom This week the Chancellor, Phillip Hammond, delivered the Autumn Budget. The focus was on a reduction in stamp duty for first time buyers and a cut in the UK’s expected growth for the next 3 years, by the Office for Budget Responsibility (OBR). Admittedly, Mr Hammond’s job was a tough one for this Budget. He was faced with the task of painting a positive picture of the UK economy to build confidence amongst the public in the crucial run up to Brexit, but had to do so against a rather gloomy backdrop of the current UK economy. One of the major points was that the OBR has lowered the UK’s growth forecast from 2% to just 1.5% for 2017, and for subsequent years to 2021. This makes the OBR more pessimistic about UK growth than both the Bank of England and the IMF. If lower growth is realised, tax receipts will fall and the Government’s target of having a rate of borrowing less than 2% of GDP will not be met, with borrowing set to be at 2.4% of GDP this year. In spite of this, this budget included the announcement of higher spending until 2023. The main point is that Stamp Duty has been abolished for first time-buyers
buying properties worth up to £300,000, which is expected to benefit 95% of all first-time buyers. Another area of increased spending includes an extra £2.8 billion funding for the NHS. As a result, the cost of borrowing will almost certainly escalate, especially with higher interest rates and inflation at 3%. However many economists will be pleased with the plans to increase spending given that it stimulates the economy. In the current climate of low unemployment, higher-thandesired inflation, relatively low interest rates, poor growth and stagnant wages, expansionary fiscal policy may be the only way to restore productivity and bolster the economy. The long-term answer to curing the UK’s below par growth rate is to improve productivity, as it too has been revised down by the OBR by 0.6% (see graph below). Low productivity in the UK since the financial crisis has its roots in poor management compared to our European counterparts, as well as a lack of investment into new technology and R&D. Deevya Patel
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NEFS Market Wrap-Up
United States Statistics released this week indicate that Canada’s quick recovery from the 2008 global economic crash has come at a large price which may have severe consequences on the Canadian economy in the long run. Data released in the US also suggests that consumer confidence is high despite large scale uncertainty surrounding the Senate tax reform bill which has come under further scrutiny this week. Whilst speaking at a Cabinet meeting on Monday, President Trump remarked that “We’re going to give the American people a huge tax cut for Christmas”. This comes despite criticisms from a nonpartisan organisation which claimed that by 2027, 50% of Americans would face higher taxes despite Trump’s promises of reducing tax rates. The organisation also claimed that the tax reforms would only raise $169 billion rather than the $1.5 trillion the Republicans have claimed. Gulf airlines also criticised the tax reforms, claiming that they were anti-competitive as they removed the tax exemptions they currently receive from flights and were being used as a protectionist measure against foreign airlines. US consumer sentiment figures, as released by the University of Michigan on Wednesday 22nd, illustrated that consumer confidence has risen in November to 98.5 from 97.8 earlier this month. This increase was greater than expected, as Reuters estimated that consumer attitudes would rise to 98. This is due to an increase in confidence in the job market, future incomes and the continued low inflation rate.
Minutes from the Federal Open Market Committee meeting (released on Wednesday 22nd) saw the likelihood of a rate hike occurring in December increase by 1.5%, making it highly likely despite concerns over the weak rate of inflation. However the release of the minutes partially weakened market expectations of a rate rise. This was due to concerns over the weak inflation rate suggesting that a rate hike was not as certain as previously believed, as voiced by some committee members. Meanwhile, in Canada, the OECD released a report on Thursday 23rd that highlighted Canada as being at risk to future economic shocks and downturns. The report remarked that Canada has the highest debt to household level ratio in any developed economy worldwide, standing at 101% of GDP. This figure is projected to continue to rise despite the apparent strength of the Canadian economy which emerged relatively quickly from the 2008 economic crisis. This suggests that a shift in policy may be required to reduce the deficit. Nicholas Gladwin
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Week Ending 26th November 2017
Europe Threats to Angela Merkel’s coalition were one of the highlights of European politics this week. Martin Schulz, the leader of Germany’s Social Democratic Party (SDP) has refused to renew the existing coalition with Merkel’s conservatives, despite pressure from allies. Following fruitless negotiations with the liberal Free Democrats (FDP) and the Green’s, it has been reiterated by the press that a reelection of Merkel is not on the table. Later in the week, we saw that the SPD had softened under pressure, with Schulz now meeting with Merkel and the German President for further discussion. As the election last September produced no overall majority, Merkel remains the acting chancellor while negotiations continue. The delay in forming the new coalition – which some are describing at “the biggest crisis of Mrs. Merkel’s political career” – has worried some EU allies, who raise concerns over the stability of Germany in the trading bloc. However once the coalition is formed, it is likely that markets will begin to stabilise in subsequent weeks. Although Germany finds itself in hot water, the outlook for the Eurozone has been very bright this week. The latest annualised growth numbers show the single currency bloc growing at 2.3%, compared with US growth at 2.2%, an outcome not many predicted.
Jean-Claude Juncker, President of the European Commission, enthusiastically conveyed this in his annual state of the union speech, in which he proudly stated: “Europe’s economy is finally bouncing back”. Such is also reflected in the changed tone of the European Central Bank’s (ECB) latest forward guidance release. Rather than making more vague promises to loosen policy as we have been seeing for years now, central bankers have expressed intentions to withdraw quantitative easing until the inflation target has been met. Preparing a pathway to end asset purchasing rather than keeping the economy floating along on a more general pledge is promising for a future return to policy normalisation and will be welcomed by markets. With record unemployment levels beginning to fall, growth on the rise and further upward trends in economic activity, it appears that Europe is on track to enter Q1 2018 in a stronger position than it has found itself in the last decade. Amelia Hacon
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NEFS Market Wrap-Up
Japan & South Korea Over the past year, North Korea has carried out numerous missile tests provoking worldwide fears of the outbreak of war. On Monday, after threats from the White House of “fire and fury” and the imposition of numerous economic sanctions, President Trump returned North Korea to the list of state sponsors of terrorism. This has been a particular worry for South Korea who share a border with DPRK, with South Korea’s democratic Party leader, Choo Mi-ae, expressing her unhappiness with President Trump’s threats. However, following Trump’s global tour and his visit to South Korea, Choo Mi-ae has expressed that there are more promising times ahead. The New York Times reported that the South Korean leader claimed the President’s visit “led to an improvement in bilateral relations”. This is very important for South Korea, both politically and economically. Being so close to such a volatile threat, the nation is in fear of nuclear strike at any time. It was announced on Friday 24th that the US and South Korea are planning an Air Force exercise aimed at North Korea from December 4th. This alliance is promising as it offers the nation protection and, through stronger political ties, better economic ties. Already the US is South Korea’s third largest trading partner, with bilateral trade between the two nations
amounting to around 60 billion dollars. There are still opportunities for expanding this alliance, particularly through energy trade. However it is vital that both the US and South Korea continue close political ties when dealing with the North Korean threat in order to maintain and grow their current economic relationship. Elsewhere, reports on Sunday 19th showed that Japan’s exports grew 14.0% in October from a year ago – this is the 11th consecutive month of export growth. This is largely due to a recovery of the global economy, leading to increased demand, and a weaker yen. This is very important as limited domestic consumption has been limiting Japan’s economic growth potential. Though this news is encouraging, driving the nation’s economic growth through exports is only a short-term fix. Japan has opened itself up to fluctuations in the global economy, which could prove very harmful in light of the political uncertainty due to volatile relations between North Korea-US and Brexit in Europe. It is important that Japan rebalances its economy in order to boost domestic consumption and offer more sustainable economic growth. Laura Leng
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Week Ending 26th November 2017
Australia & New Zealand The Global online retailer, Amazon, launched its Australian site this week on Friday 24th November. This comes just in time for Black Friday sales and follows a soft-launch of the site earlier in the week. Amazon has high hopes for the Australian market. It anticipates having a huge influence on the structure of the Australian consumer market by increasing the share of sales completed online. The launch of the Australian website has been met with much excitement from consumers, with its arrival before Black Friday and Christmas potentially meaning huge returns for the company. Prior to the website going live, researchers asked Australians if the arrival of the global giant would affect their spending. 42% of people said they expect to spend more money online when Amazon arrives. For such a developed economy, Australia has fairly low levels of online shopping sales. Compared to the UK and the USA, at approximately 15% and 14% respectively, Australians only buy about 7.4% of their purchases from the internet. In addition to this, Cathie Wood, the CEO of ARK Investment Management, has said ‘I don’t think it will take very long to get to 10%: maybe 18 months to two years’. The Australian online retail sector is therefore set for huge growth in the next few years.
is potentially dangerous for incumbent retailers. It is not until recently that domestic firms, such as Woolworths, Harvey Norman and David Jones, have had to compete with new, foreign entrants into the market. The first and biggest entrant was the German supermarket, Aldi, which launched in Australia in 2000 and caused huge disruption in the market. With Amazon being the fastest growing retailer in the world, its entrance is likely to introduce high levels of competition. Although competition will prove beneficial for consumers, the story for staff may not be as positive. Amazon is known for its difficult working conditions. Although it will create hundreds of new jobs for the country, the Australian Government will have to watch out for substandard work practises from the company. Ultimately, Australia’s retail sector is still largely store based and, as UBS stated, Australian retailers are still ‘well placed’ to compete with the arrival of Amazon. The site’s launch will also be useful for small businesses which have the opportunity to join the Amazon Marketplace. Overall, the arrival of Amazon will be positive for the Australian economy by introducing more competition and helping the online sector to grow. Abigail Grierson
Although the arrival of Amazon will be revolutionary for Australian consumers, it
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NEFS Market Wrap-Up
EMERGING MARKETS
Middle East Following the anti-corruption crackdown by Prince Mohammed bin Salman in early November, the 32-year old crown prince’s vision for Saudi Arabia is expected to radically transform the Saudi economy and modernise the society. Saudi Arabia is moving towards a more diversified economy, a vibrant and expanded private sector and a meaningful role for women in the society. The country will issue its first tourist visas in 2018 to attract conventional tourist to the kingdom as the country plans to reduce its reliance on oil. It’s aiming for 30 million visitors a year by 2030, up from 18 million in 2016. It also wants annual spending to hit $47 billion by 2020. In order to attract people to experience the grandness of the country, several ambitious projects have been announced. These include building resorts along 100 miles of the Red Sea’s sandy coastline and open a Six Flags (SIX) theme park by 2020. Saudi Arabia also plan to build a new $500 billion metropolis that spans three countries, which will be powered entirely by regenerative energy while making use of automated driving technology and passenger drones. Nikola Kosutic, senior research manager at Euromonitor, stated: "Saudi Arabia holds tremendous tourist potential due its favourable temperature, historical and cultural heritage, natural beauty and rich marine life. But it is surrounded by
politically unstable countries where security has always been an issue." However, economic diversification remains a huge challenge for the country since its dependence on oil remains critical, accounting for about 80% of the country’s export receipts and budget revenues. Importantly, diversifying Saudi employment to create a more balanced industrial structure is a huge struggle since there is a structural mismatch in the skill and educational qualifications of the Saudi workforce. Saudi nationals occupy fully 90% of public sector jobs but only 19% of those in the private sector, where expatriate labour dominates. Prince Mohammed’s efforts to modernise the country are also already in confrontation with Saudi’s rigid cultural traditions and attitudes, such as breaking the decades-old taboo against women driving. The task is vast, and will be exceptionally complicated by politics, profoundly conservative social attitudes and limited technical capacity. Saudi Arabia will need a prolonged period of regional calm for at least a generation if it is to succeed in this historic transformation. History and the Prince’s own people will hold him accountable for the success or failure of this great leap. Hayati Sharir 8
Week Ending 26th November 2017
Africa This week we will be taking a look at the economy of Zimbabwe following the country’s change of leadership after the resignation of Robert Mugabe. Robert Mugabe stepped down as president of Zimbabwe on Tuesday after parliament was starting impeachment proceedings against him, thus ending his 37-year rule. His rule however started with optimism, as Mr Mugabe was initially praised for having one of Africa’s best education systems and leading providing optimism of independence, however this positive outlook quickly deteriorated over time. Mr Mugabe become more autocratic overtime and pursued damaging economic policies. These included overseeing a fierce land reform campaign, breaking with international creditors and leading Zimbabwe as the nation saw one of the world’s worst bouts of hyperinflation. In 2009, Zimbabwe was forced to abandon its currency with the inflation rate being reported at 231,000,000% in July 2008. When Zimbabwe decided to abandon its currency, US$1 was equal to Z$35 quadrillion. With no local currency, money supply became entirely dependent on inflows of the dollar, which in effect deprived the country of control over monetary policy.
The estimation of the country’s unemployment levels vary greatly, with the World Bank estimating the figure as low as 5% but Zimbabwe’s biggest trade union claiming the rate to be as high as 90% this year. The land reform distribution policy undertaken in 2000 accelerated economic decline, with real GDP plunging by 45% in the decade to 2009. There was a massive fall in farm production and output levels in 2008 were two-thirds of their peak in 2000. Emerson Mnangagwa has been sworn in as the new leader of Zimbabwe during a ceremony on Friday, in which he promised to hold democratic elections next year. He also sent a message to the western world, in which he stated his openness to start reengagement with countries across the world and asked countries to reconsider the sanctions placed on Zimbabwe saying, “I wish to be clear, all foreign investment will be safe in Zimbabwe”. Turning around the deteriorating economy will be the new president’s greatest challenge. As Vice President, Mnangagwa supported attempts for Zimbabwe to pay off its debt, so that the government could access financing, and to re-engage with the World Bank and the IMF. Abdul Akhtar
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NEFS Market Wrap-Up
China In this week’s wrap-up, the importance of a shift toward consumption-led growth and the need to capitalise on a rapidly digitalising economy. China is cutting import tariffs on 187 consumer goods, from baby products to whisky, in an attempt to spur economic growth through spending and deliver on its promises to become a more outwardoriented global economy (especially in light of the USA’s recent sentiments). The Finance Ministry has said cuts will take effect from the beginning of December, dropping tariffs from an average of 17.3% to 7.7%. The cuts are part of a potential shift towards a consumption-led economy, away from the debt-laden growth China has been seeing of late. China’s growth rate and the sheer need to shift to consumption-led growth are “easily” the most important influences on the global economy, according to British Economist and Economics Professor Jim O’Neill. The Chinese central bank recently injected $47bn into its financial system, the largest intervention in nearly a year, in an effort to create liquidity and encourage consumer spending. The efforts to increase consumer spending must take into account changing consumer shopping behaviour. There has been a growing divergence between online and offline retail sales – 34% and 6% respectively, not including the $25bn spent on Single’s Day, China’s equivalent of Black Friday.
Alibaba may be worth more than $60bn. China’s government has encouraged growth within the digital economy through its Internet Plus policy, which encourages firms to use the internet in order to grow and innovate. If China wants to provide economic growth through increased consumer spending, it needs to have a keen eye for streamlining transactions in the digital economy. Wu Lianfeng, Vice President of research company IDC China, says that by 2020, China will see 20% of its banks, 30% of its supply chains and 10% of its healthcare institutes fully embrace blockchain technology in their operations. It is said that China will overtake the USA as the top market for digital payments by 2020, according to BNP Paribas and Capgemini. It is said that Chinese consumers are more willing to store payment information on their smartphones and devices, and that they are generally “unusually eager to embrace technology”, in the view of the Economist. China breeds financial-technology start-ups quickly, and is home to many of the world’s most valuable fintech firms. To fully capitalise on this opportunity and provide the consumer spending its economy needs to grow, the Chinese government needs to continue breeding this innovative and technological drive. It should also focus on improving transaction methods and encouraging engagement with digital markets. Matthew Chapman
China has a rising digital economy, equivalent to 30.3% of GDP. This is driven predominantly by its largest technology companies: Baidu, Alibaba and Tencent. 10
Week Ending 26th November 2017
Latin America This week we focus on the first round of the Chilean election and its effect on the nation’s markets. Additionally, we will assess Mexico’s decision to raise its minimum wage. Last Sunday, Sebastián Piñera, expresident of Chile, won the first round of Chile’s presidential poll with 33.6% of the vote. However, the conservative politician has failed to gain an outright victory. This means that Piñera will face a runoff against socialist contender Alejandro Guillier next month, who attained 22.7% of the vote. Piñera, the billionaire Chilean president from 2010 to 2014, was widely expected to cruise to victory. Investors hoped that the contender would be able to revive investment and growth within the country through his promises to cut tax and reduce red tape. His manifesto and the expectations that he would win have helped push the Santiago Stock Exchange IPSA index to record highs. However, Piñera’s underperformance suggests that there will be a tighter second round and there is a possibility that he might not win. Movements within Chilean markets reflect the reactions to this risk. Sunday’s outcome caused the IPSA index to fall by 5.9%, its sharpest fall since 2011. The Chilean peso also saw its largest depreciation since 2013, with its 1.86% drop shown in the diagram below.
Despite the uncertainty of the future president, whoever it is will be faced with the challenge of a diverse and less experienced Congress. Mexico’s Minimum Wage Commission has decided to increase the country’s minimum wage by 10% to $4.71 per day next month. Mexico’s minimum wage is currently the lowest in the OECD and one of the lowest in the Latin American region. The nation has been criticised throughout the North American Free Trade Agreement (NAFTA) talks for poor working standards and low manufacturing wages, which have consequently created unfair competition. However the proposed minimum wage rate is unlikely to satisfy the US or Canada, as it is still far below their respective wages. Furthermore, the proposed rate is still below the poverty line, with Mexico’s National Human Rights Commission warning that the increase is not enough for a single worker or family to obtain their basic needs. It is believed that the impact of increasing the minimum wage on encouraging inflation (which is currently 6.37%) has limited the commission’s decision. Jessica Murray
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NEFS Market Wrap-Up
Russia & Eastern Europe On November 23rd, the Swiss President announced that Switzerland would offer 1 billion Euros in “autonomous aid” to Eastern Europe for a 10-year period, with the purpose of diminishing “economic and social disparities”. On the same day, Bloomberg wrote that “Eastern Europe’s banking sector is on an upswing”. This week’s article will discuss how economic performance and local politics are affecting investment prospects across the region. Eastern Europe is an extensive and diversified area, which has benefitted from accelerated economic expansion this year. As a result, banks in Poland experienced a total net income increase of 8% in the first 9 months of 2017, whilst the profits of OTP (Hungary’s biggest bank) increased by 20% during the same period, after the country’s government cut what was the highest banking tax in Europe. The CEO of ING Bank announced a high increase in third-quarter earnings and a “rebound of investments”. Nonetheless, the attractiveness of the countries in the region is starting to diminish as a result of the rise in nationalist authoritarian governments and their implementation of strict, hostile policies. Hungary’s Prime Minister limited foreign investment in a number of strategic sectors, whilst Poland’s leading party directed a similar policy towards the banking sector (the majority of which was comprised by foreign-owned banks). The two countries, along with Slovakia and the Czech Republic, also actively express
their opposition to sheltering refugees in their political discourse and have refused to comply to the EU quota plan. The respective governments are facing the risk of heavy fines if they continue to challenge the quota. Hungary’s prime minister, who has started his campaign for a third consecutive term, has also been criticised for undermining democracy and EU values by restricting the freedom of the press and civil society bodies. After joining the private equity China-CEE fund, Hungary was voted as the riskiest country in the CEE according to the Risk & Resilience report released on Thursday 23rd; the Czech Republic was voted as the second riskiest. The CMS head of banking in Hungary remarked that “Hungary’s changing financial regulatory laws do not give great certainty for foreign investors.” The increase of far-right movements and nationalist governments in Eastern European countries signify a divergence from fundamental democratic values in these areas. It also gives governments more control over the courts and national election commissions, whilst undermining the freedom of movement in competitive markets within the EU. Though the economies of Eastern European countries are booming, such high-risk political profiles will deter investment unless legislation and policies improve.
Felicia Bogdana Cornelia Ababii
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Week Ending 26th November 2017
South Asia Myanmar’s government reached an agreement with the Bangladeshi Foreign Minister Abul Hassan Mahmood Ali to cooperate on the Rohingya refugee crisis. Deadly violence amid a military crackdown on insurgency in August prompted more than 600,000 refugees to flee across the border to Bangladesh. The UN has called the violence an ethnic cleansing. The agreement signified that efforts to repatriate the refugees to Myanmar would begin within two months, but provided little else substantive. International cooperation through the UN and other international NGOs will likely be necessary to ensure regional stability and the safety of the refugees. In Sri Lanka on 20th November, Prime Minister Ranil Wickremesinghe was called before a panel on the Bond Commission, to inquire into the 2015 bond scandal. The bond scandal involved an unusual bond sale that shed light on collusion between the Central Bank and a trading firm, and has led to accusations of corruption within the government. The inquiry has implicated several high level political officials in cases of insider trading. Sri Lanka fell 12 places last year on a ranking released by Transparency International that tracks corruption. This has had negative implications for foreign debt repayments, as the appearance of corruption will make it more difficult to secure foreign funding.
Sri Lanka has US$7 billion in foreign currency reserves, and is due to pay over US$5 billion on maturing foreign loans and interest in 2019. Foreign direct investment has declined 54% in 2016 to US$450 million. A panel was formed this month in India to help ailing banks merge with more robust banks. India’s banking system has struggled under a mass of bad loans and the inefficiencies of its state-owned banks. As of June, the state-owned banks held 7.33 trillion rupees (US$113 billion) in bad loans. The graph below shows how the total amount of non-performing loans has risen in recent years. The government announced last month that it would inject 2.11 trillion rupees (US$32.4 billion) into the banking sector, but this will fail to cover the scale of the problem. Instead, the panel hopes to make the banking sector more robust by creating strong and competitive banks. The success of this initiative requires that lending increase, as this will help banks with their internal capital generation. Yet bank credit grew by just 6.1% on the year to September, compared with 10.8% last year. However improvements to the banking system may encourage lending in the coming year. Daniel Blaugher
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EQUITY AND DEALS NEFS Market Wrap-Up
Financials Markets appeared to rally on Tuesday following last week’s disappointing performance. The Dow, S&P 500 and NASDAQ all hit record highs following an impressive growth in tech stocks that helped to boost the broader market. Better than expected earnings also supported this week’s growth. In fact most companies have managed to beat market expectations, which is a positive fact for the market.
The FTSE 100 however didn’t fare as well as its American counterparts, with falling Centrica shares leading the decline this week. The energy company announced that it had lost over 800 000 customers between July and October. Its share price also fell 16% on Thursday after it warned that its earnings per share would be 20% lower than market expectations. The company’s value has regressed back to what it was 14 years ago.
The S&P 500 broke its 2600-point milestone this week on Tuesday, as the index grew 0.7%. This week’s growth was led by the technology and health sectors, which are up 3% from September. The continuing bullish market has prompted Goldman Sachs to boost its S&P forecast. It now predicts that the index will trade at a higher valuation next year and will reach 3000 points by the end of 2019. It’s been a year of milestones for American indices, as the Dow Jones has increased by about 4000 points since the start of the year and the NASDAQ is close to breaching 7000 points. The S&P 500 is up 16% this year and is en route to having its best year since 2013.
On Thursday the CSI 300, which replicates the combined movements of the Shanghai and Shenzhen stock exchanges, fell 3% - the largest drop since mid-2016. The decline comes as a result of rising bond yields and worries about the Chinese government’s on-going mission to tighten rules on lending. The increasing yield from the Chinese government’s 10year bonds have left investors less willing to channel their capital into stocks, as the higher returns from the risk-free asset (bonds) have led to reduced market inflows and thus reduced market ability to sustain growth. Changu Maundeni
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Week Ending 26th November 2017
Technology & Health China’s technology sector has developed at an exaggerated pace, leading to recessionary expectations. China’s BATs (Baidu, Alibaba, and Tencent) have increased in value at unnatural levels compared to the USA’s FANGs (Facebook, Amazon, Netflix, Google, among others). The MSCI Index (a weighted index of 1,652 stocks around the world) for China increased 55.6% for the year. This was led by massive stock value growth in Tencent (127% stock growth), followed by Alibaba (117% stock growth) and Baidu (51.6% stock growth). This is a very strange occurrence, due to the vast amounts of uncertainties surrounding Xi Jinping’s attempts to assert more control over the Chinese economy and many Chinese officials expressing their worry about China’s debt situation. This unexpected and sudden development of Chinese tech stocks is led by stocks quoted outside of Mainland China, hence making it very dissimilar to its predecessors. The CSI 300 Index (a composite of stocks from Shanzhen and Shanghai) lags behind MSCI’s China Index, at 20% growth for the year.
technology stocks, China seems to be setting itself up for a burst-bubble scenario, with ludicrous increases in its IT stocks. Looking at China’s bonds market, things are also not looking good. China’s 10-year bond yields have now hit 4%, meaning higher risks in Chinese bond investments. As Xi Jinping is expected to attempt to rein-in China’s debt, tech stocks are forecast to also be affected. Further concerns within the Chinese government about Minsky Movement, a sudden collapse in debt confidence, solidify this. Wise investors should therefore look at companies such as Alibaba, Tencent, and Baidu, and expect a fall in stock prices as the markets adjust to over-hyped confidence in the Chinese technology market, especially at a time when the Chinese government is as unpredictable as ever. Though it may be that China has seen incredible growth in the past year, it is unwise to accept stock levels which seem too good to be true. Mario Pucinelli Filho
Worryingly, Capital Economics’ price/earnings ratio showed that 35% of MSCI’s China Index are from IT stocks, whilst IT companies in the US stand at only 20%. This shows how in terms of its
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NEFS Market Wrap-Up
Oil, Gas & Industry This week ConocoPhillips decided not to invest in any ventures that require an oil price of $50 or more to increase profit margins, following years of poor profits. The US’ largest exploration and production firm has also committed to investing more in shale oil resources in North America, with the view that operations there are able to best withstand volatile markets. Companies part of the US shale oil and gas industry have overall produced poor returns on capital, being unable to recuperate their expenditure of drilling and complete new wells from their cash flows. Conoco's CEO, Ryan Lance, mentioned: “The whole E&P sector, really, has not performed very well, even [through] the commodity price cycles”. Mr. Lance is expected to increase capital expenditure in 2018/20 to an average of $5.5bn a year, compared to $4.5bn this year. Achieving this could be difficult considering rising oil prices (see graph below).
Rosneft, Russia’s state-run oil group and new partner to CEFC China Energy, have agreed a supply deal of approximately 61m tonnes of oil over the next five years, bolstering the corporate link between Moscow and Beijing. The deal will consequently see Russia crowned as China’s largest oil supplier. CEFC, a financial services and private energy group, has expanded quickly in recent years due to overseas investments. The price of the deal will be determined between 2018 and 2022 using a formula pegged on the global oil market. CEFC is still in the procedure of buying 16% of Rosneft, worth $9.1bn. Both companies have suggested that they will look into joint projects in petrochemical production and retail sales. The deal is seen as a successful investment from CEFC’s point of view, considering their success when they invested in Rosneft back in September this year. The deal will also give CEFC access to approximately 244,000 barrels a day of crude oil and will overall improve their oil trading status. Sarren Sidhu
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Week Ending 26th November 2017
Deals News that the two gambling goliaths William Hill and Paddy Power Betfair were competing for a deal with Australia’s CrownBet spread like fire on Friday. The markets also reacted excitedly, with the share price of PADDY PWR BET (PPB) rocketing by 275p to £88.10. The shares of William Hill however slouched slightly by 1.7p to £2.82. Yet these reports were quickly smothered by various sources, with Paddy Power Betfair quoting from the PR handbook: we do not comment on speculation about mergers and acquisitions. However, William Hill admitted they were in “very preliminary discussions” with CrownBet. But why would CrownBet be so appealing for the vying parties? In September the British government announced plans to limit the maximum stake on betting machines in gambling venues. This has sent alarm bells ringing for two reasons. Firstly, this decision will deduct from a reliable revenue stream. Secondly, this may be the first step in a wave of changes proposed by the government as it tightens regulations around betting. Australia on the other hand provides greener pastures for these companies. A deal with CrownBet, whose parent company Crown Resorts in June 2015 had a market capitalisation of over
AUS $7.5 billion, would provide the opportunity to establish a strong foothold in the country for William Hill. Paddy Power Betfair has been a giant on Australia’s gambling field through Sportsbet, which is the largest bookmaker in Australia. William Hill however has been unable to follow in the success of its UK operations, despite its Australian acquisitions of Sportingbet and Tomwaterhouse. Just one advertisement break during a football match would show the sheer number of betting agencies operating in the UK. But times are changing and companies must adapt to survive. Higher taxes and stricter regulations have shifted the ground beneath these companies, forcing rival companies to merge in order to survive. In 2015 Ladbrokes merged with Coral, while in 2016 Betfair joined with Paddy Power to form the number one online gambling company. It is easy to see the reasons behind the interest of this deal, but analysts can only speculate as to the structure and valuation of any potential deals. Sembian Balachandran
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NEFS Market Wrap-Up
COMMODITIES
Agriculture & Resources Brexit negotiations are stumbling, as the EU and UK government have not reached any deals 17 months after the referendum. Consequently the UK agricultural sector is facing tremendous uncertainty, especially after the issues regarding labour shortages and food prices surfaced. Food prices have been experiencing steady increases since the referendum, including a 4.2% year-to-year increase this October. The number of seasonal immigrant workers in British farms has dropped 17% since the referendum. However Britain’s unemployment rate is now only 4.3% (its the lowest level in 42 years), meaning farm owners would find it hard to hire British replacements if those migrant workers left. For example, Laurence J Betts, a major farm in Kent supplying 5% of the lettuces in the UK, employs all of their farm workers from Eastern Europe. Of the 13,000 agricultural seasonal workers recruited in the UK from January to May 2017, only 14 were British. If the free movement of labour was compromised in the future, which is very likely to happen, migrant workers would find it very hard to stay in the UK. Labour shortages would lead to vegetables and fruits being left to rot in the fields, thus harming farmers’ revenues and reducing food supply. A study by RSA’s Food, Farming and Countryside Commission found that ‘the
five-a-day health target’ by the NHS which adds up to the 35 portions of fruit and vegetables a week – was overwhelmingly met by food grown in the EU or harvested by EU workers in the UK. A “no deal” scenario in Brexit negotiations would consequently greatly affect UK food variety. March 2019 is the Brexit negotiation deadline, yet farms could find themselves in a very difficult position if the government failed to tell them what its plans were in advance. The National Farmers Union is urging the government to introduce a seasonal workers scheme to tackle the labour supply shortage, otherwise UK food supply could be in jeopardy and prices could rise significantly. Moving on to hard commodities, miners at Chile’s Escondida Mine, the world’s largest copper mine, started a strike on Wednesday. BHP Billiton and Rio Tinto own nearly 90% of the mines, but companies have said that the strike is not delaying their operations. Mining strikes could become very detrimental for mining giants if disagreements were not resolved. Earlier this year, Rio Tinto was hit by a 43day mining strike, the longest private sector mining strike ever in Chile, which cost the firm $1bn. Ang Gao 18
Week Ending 26th November 2017
Energy After losing 823,000 domestic energy customers in four months, Centrica's share price slump may be the company's worst one-day drop after 1997 (see graph below). According to the FT, the poor performance of Centrica is mainly caused by issues in its North American division and the incredible volume of customers lost in the UK. This was due to the decision by British Gas to raise standard electricity prices by 12.5%. Mr Conn, CEO of Centrica, stated that, thanks to efficiency savings, the performance of the UK domestic business is “broadly in line” with last year. However, the new UK government’s plan to implement a price cap could potentially damage Centrica, as well as other energy firms in the country, but it is not expected to be enforced until 2019. On the contrary, global dividends’ growth rate jumped by 14.5% during the third quarter of 2017, growing at the fastest pace since early 2014. The rise in global dividends was plausibly supported by a “broad and synchronised improvement in global economic growth”, according to the Janus Henderson Global Dividend Index report. Jane Shoemake, Investment Director at Janus Henderson stated: “We’ve had a much better commodity environment . . . but also massive attempts by companies to improve their operational efficiencies and cash flow.”
In the meanwhile, Exxon Mobil followed its European peers in a new action “to further reduce methane emissions from the natural gas assets”, as they stated in a joint statement. According to research, almost 10% of gas extracted, processed and transported is released into the atmosphere. As a result, this agreement between global oil and gas companies aims at decreasing carbon emissions to curb global warming. According to a recent report by the Institute for Energy Economics and Financial Analysis, India’s demand for coal will reach its peak by 2027, which is earlier than forecasted. Whilst this means demand for renewable energy could rise earlier than anticipated in India, it will also create a problem for mining companies. India is already the second-biggest consumer and importer of coal in the world, and its power sector relies mainly on coal to operate. Arunabha Ghosh, chief executive of the New Delhi-based Council on Energy, Environment and Water, stated: “There is no question that a combination of technology change and market conditions means that the space for new coal is going to shrink more and more.” Giovanni Cafaro
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies There was no rest for the USD this week as the US Dollar Index fell to 92.70. This is its lowest point in more than a month, after markets interpreted the minutes released this week by US Federal Open Market Committee (FOMC) as more dovish than expected. The US Dollar Index remained under strong downside pressure this week after the release of FOMC minutes on Wednesday. While US Federal Reserve officials largely expressed optimistic views on the US economy, they disagreed on the pace of inflation. Some members thought that the Fed could be in danger of waiting too long for US inflation to rise to its 2% inflation target and could risk causing instability in the financial markets. This is in contrast with what the US Fed Chair, Janet Yellen, wanted as she recently made comments on how raising rates too quickly could hamper the goal of reaching US Fed’s 2% inflation target. FOMC members were also concerned that a sharp reversal in asset prices could have damaging effects on the US economy. The FOMC minutes stated: “In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential build up of financial imbalances.” With the major US stock market indices like S&P 500 and the Dow Jones Industrial Average having made several
all-time highs this year, it is not unwarranted to be concerned about a sharp and painful stock market correction sometime in the near future. However, according to the CME FedWatch Tool, markets are still pricing in a 91.5% chance of a rate hike by the US Federal Reserve at the 13th December meeting. The Chicago Mercantile Exchange (CME) group created the FedWatch Tool, which uses fed fund futures contracts to calculate the probability of the US Federal Reserve changing monetary policy at a particular meeting. As such, Fed fund futures is now being used by investors to gauge the trajectory of future US interest rates. Major currencies started rallying hard against the USD after the release of the FOMC minutes. EUR/USD gained almost 200 pips in two days, rallying from $1.1738 to $1.1925. GBP/USD finally broke out of its tight price range to trade as high as 1.3360. USD/JPY went into a free-fall immediately after the release of the FOMC minutes, breaking below ¥112 before settling at ¥111 for the week. Looking ahead, the main focus for next week is the highly anticipated OPEC meeting, as OPEC members and Russia convene in Vienna to extend oil production cuts beyond March 2018. Mingli Yong 20
Week Ending 26th November 2017
Minor Currencies TD Securities, the global financial services giant, has tipped the New Zealand Dollar (NZD) to recover against the Pound (GBP). The GBP/NZD exchange rate is currently at 1.94, a recovery from the lows of 1.74 in mid-July. But Mark McCormack, head of FX Strategy at TD Securities, believes that whilst the GBP is overvalued at such levels, NZD is undervalued. Foreign exchange analysts at UBS back this assertion, where they estimate the long-term fair-value as 12.0% higher than the actual market value. The Mexican Peso’s (MXN) performance against the US Dollar (USD) was its best week since July, gaining almost 2%. It was apparent that optimism for the North American Free Trade Agreement (NAFTA) contributed towards the gains, before the Bank of Mexico Governor, Agustin Carstens, stated that the Peso is “undervalued in general terms”. However there’s no denying that the slide of the USD across the board contributed to the Peso’s success, in addition to a 2-year high in crude oil prices and an improvement in global risk appetite.
ZAR. The ZAR has dropped as much as 2% to 14.1585 per dollar on Friday, with 7.5% of its value having been lost since the middle of the year. The Swedish Krona (SEK) weakened further against the Euro (EUR), with the SEK/EUR falling 0.6% to 10.06. This is only the second time the Krona has fallen past the milestone of 10 since the financial crisis. Kerstin af Jochnick, Deputy Governor of the Riksbank, described the weakness of the Krona as “temporary” and that in the long-run “the crown will strengthen”. Following the statements by the deputy governor, the SEK rallied sharply above the SKr9.9 level, closing in on a 0.5% gain over the course of the session. However the currency remains vulnerable as inflation was reported to have dropped below the 2% target, falling from 2.3% to 1.8% in October. Edward Turner
On Friday the eagerly awaited S&P global ratings downgraded the South African Rand’s (ZAR) debt to junk territory. S&P stated: “weak GDP growth has led to further deterioration of South Africa’s public finances beyond our previous expectations”. However Moody’s decision to just put the currency on review proved to prevent an even larger sell-off of the
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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